I’m suggesting the big banks be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk and the leverage will be something reasonable.
This from the guy who provided the impetus and the funds to end Glass-Steagall? Totally absurd — akin to Joe Stalin renouncing Marxism-Leninism and the gulag archipelago on his deathbed.
Glass-Steagall’s separation between depository and speculative institutions — especially during the Bretton Woods period — was a relatively robust system; there was never a large-scale banking calamity of the nature of 2008 or 1929 under its regime. Certainly, it had its imperfections — above all else that it never prevented bankers like Weill from chipping away at it up to the point of repeal — but the proof of the pudding is in the eating, and Glass-Steagall presided over a period of growth and stability.
While the data tends to show that the end of Bretton Woods in 1971 was the real catalyst of the financialisation, globalisation, deindustrialisation and debt buildup that ultimately flung the US into a depressionary deleveraging trap, the end of Glass-Steagall was profound.
Depositors’ funds became a medium for the creation of the huge and sprawling shadow banking and derivatives webs.
The blowout growth in shadow banking was presaged by the end of Glass-Steagall in 1999:
And the slow contractionary deleveraging of shadow banking has been a significant force in keeping the economy depressed since 2008. Any contrition on the part of Weill for his role in repealing Glass-Steagall might as well be an attempt to close the stable door after the horse has bolted. It’s like trying to uninvent the atom bomb after Hiroshima. Weill was the guy who — above anyone else — was responsible for the damage done.
Coming out and claiming that reimposing Glass-Steagall would fix the problem is inadequate. If he wants to be taken seriously he should match every dollar he spent trying to get Glass-Steagall repealed with new lobbying funds to reimpose a separation between banks that accept deposits and the shadow banking and derivatives casinos.
Beyond that, I think that this is very telling. The financial institutions will do anything to avoid the ultimate free market solution — the disorderly liquidation of the system they created via default cascade. If high-ranking members of the financial elite are willing to talk about reimposing Glass-Steagall, they must be seriously concerned that the system they built is getting dangerously close to self-destruction.
azizonomics 
Glass-Steagall wasn’t repealed. Only the provisions separating deposit banks and investment banks. If Glass-Steagall had actually been repealed, we would not have had the crisis that we now find ourselves in. Glass-Steagall instituted the FDIC which still persists to this day. Had the FDIC been abolished along with the prohibitions on merging into TBTF institutions, the banks would have had to act responsibly to attract depositors and customers. Since the taxpayer would pick up any losses with FDIC the condition for moral hazard was in place and we got everything you refer to above.
Rather than re-instituting Glass-Steagall, we need to properly repeal it.
In the long run, I would prefer that. But if the main option on the table is the status quo or the old system, I think I would prefer the old system. Not that that is guaranteed to really make much difference.
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This is as laughable as it is unlikely.
If I was a major player in removing the barriers that caused the mess in the first place, I would want to be remembered as the guy who had the solution when everything collapses.
Otherwise he would be looking over his shoulder daily.
Wise man.
Will Blythe Masters come out against using precious metals derivatives?!
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I (and most economists now) don’t think the “repeal” of Glass-Steagall had anything to do with the crisis. The initial damage was almost entirely concentrated on investment banks. Damage to commercial banks was a “secondary” consequence of the fall in industrial productivity, and thus the health of debt of all kinds. Slightly related, I really recommend Jeffrey Friedman’s and Wladimir Kraus’ Engineering the Financial Crisis, which I review here. It is, hands down, the best book on the financial crisis.
Jon, I agree with you. The financial crisis, although multi-level and mufti-dimentional, is a classic debt crisis [of 40 year duration] with numerous varieties of fraud added in for good measure.
Allowing commercial bank “deposits” to be parlayed at the casinos made perfect sense to the professional financial community that shoots first and rationalizes later, well after the “profits” are stashed away.
The prisons in the U.S., U.K., Germany, Australia, and the rest, should be overflowing with bankers, accountants, politicians, ratings agency people, etc.
The point is not that the end of Glass-Steagall caused the financial crisis. It is obvious to me this is a long term debt/deleveraging issue. But the growth (and resultant deleveraging) of shadow intermediation and derivatives is a big contractionary factor on the wider economy up ’til today and that seems fairly clear.
Additionally, I don’t consider it to be deregulation, because the drip-feed of FDIC insurance and the potential for bailouts remained in place. Gramm-Leach-Bliley was moral-hazardisation more than anything else, as well as a larger and more complex piece of regulation than Glass-Steagall, which was simpler and more comprehensible.
Glass-Stegall was repealed because of the penis envy over the growing size of Japanese and European banks. While a lot of this envy came from bankers, it was even more pronounced in politicians.
The sin of envy created this mess and the country deserves the consequences. The sad part is the denial of the problem even this far into it.
To paraphrase my mom: little banks – little problems; big banks – big problems.
Zerobs is right on the money. Smaller businesses are less of a danger if they screw up. it is like mini farms with varied climate and soil. if one farmer stuffs up, we don,t starve. if the state assumes the entire nations farm and plants one crop we starve. remember Stalin ordering big collective farms in ukraine in the 30’s. amine and 6million dead in ukraine.
He is absolutely right. Small is beautiful. Regulators, societies, governments and companies will ignore this at their peril.
Despite having spent a couple of decades on Wall St when it was only corrupt at the margins, I’ve recently opened an account at a couple of mom and pop banks, one, privately owned by a bunch of Eye-Talians gave up its National Banking franchise and elected to be a PA State bank because of Dodds-Frank.
The other I like because its board of directors includes my boys orthodontist and a local landscape guy.
Mark to Market Accounting rule requirements were the trigger for the extreme market volotility that caused everything to unravel. I firmly believe many players took advantage of this new rule requirment which caused it to be eventually repealed to Mark to Fantasy.
how many retirees panicked and sold at the bottom? This was systematic theft of an entire genrational class of investors. The market players with their Ivy league psychologist advisors shook the fruit tree so to speak.
mark to market is a logical method to report company and banking balance sheet strength, but allowing naked shorting and other market tools to “shake the branch” should be banned controlled or limited. So many investors are now everyday common people who are not sophisticated enough to understand these processes.
These Bankers bond vigillantes and other parasites have preyed on the investing generation who were forced to put their life savings into market investments due to lower interest rates on traditional Term Deposits. This is theft. Simple.
The quicker politicians investigate that they were mislead by lobbyist, public executions like China take place, the quicker public faith in the markets will return.
Risk capital should only be supplied by sophisticated investors. Not the working class. bring back real rates of interest, not negative rates. My grandfather warned me about the New fangled retirment saving systems put in place around the world. He said the Bankster class will eventually steal it. I thought he was paranoid. This was 25 years ago before the information on the internet. I guess he understood human nature. He is not around to be proven right, but I will remember his warnings.
Return the capital. Tax these offshore accounts. redistribute the theft or
Off with their heads.
There is something crazy about mark to market, because it allows the deviations of the stock market to transmit volatility onto companies balance sheets. That isn’t healthy — markets can stay irrational longer than companies can stay solvent.
Then the company should not have volatile assets in its balance sheet. If they do, Investors can price the equity accordingly for the higher risk. Right now we don’t know what the balance sheet IS WORTH. It is like the lucky dip at the Fair.
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Nice try but I recall the Citi/GS bailout of 1994 because of the tesobono debacle.
A couple of years earlier, of course, Citi, effectively insolvent, had been bailed out after the Hong-Kong bank run. The Fed hammered down Fed Funds by an unprecedented 200 BPs in less than a year to allow the bank to rebuild what passed for its balance sheet.
We ethnic based community banks the Ukrainian Community has a very healthy Co-operative based Financial Deposit Taking Institution. The rates of interest are higher than then Big 4 Australian banks and they actually fund cultural events and sponsor worthy community projects. We only lend to members of community repute, so the trust is there to deposit hard earned life savings.
http://www.dnister.com.au
If I want to earn higher returns I can go to E Trade. I don’t need a bank to invest in market securities. I need a bank to channel savings to the next generation. I need a bank to lend to a couple who has integrity, not some bum who will blow it. The community shame on your family name is a powerful reminder to pay back your loan!
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“The community shame on your family name is a powerful reminder to pay back your loan!”
Although the corporate structure of business provides nearly universal access, it is the final destination of such a portal that should be noted.
How many people in the U.S. still have accounts of Bank of America [including myself] simply because they are EVERYWHERE and provide the illusion of security.
I imagine that the corporate business model must have been formulated via close observation of the female of our species, i.e., you are lured in with all kinds of irresistible bells and whistles [real or imagined], stroked to contentment, then shackled for life.
The Dnister Ukrainian Co-operative Bank started out of the Ukrainian Catholic Cathedral basement in Melbourne. The main business centre is an obscure commercial building with simple sign writing. It just exists and does not waste funds on needless advertising.
People like convenience and a large network of ATMs and branches. But who uses cash these days. I can use my Credit card and top up via the internet. The Dnister Ukrainian co-operative bank is one of the most efficient business models I have seen. One head office services all the admin and IT needs. A joint partnership with a major bank allows you to deposit funds. There is little cost overheads to wipe out BP’s on your savings.
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For someone who got their ass handed to them we sure did kill a helluva lot more you yankee sumbitches than ya’ll killed of us.